FHA Loosens Rules on Condo Lending

(MoneyWatch)  That's right, you read "loosen."

If you've been thinking about buying a place in Miami, I'd say now is a really good time.

A number of changes are coming out of the FHA, the Federal Housing Administration, a government-backed entity that supports most of the home lending currently taking place in the United States.

You may have heard about the tightening steps getting ballyhooed. For example, the FHA currently requires only 3.5 percent as a down payment on a loan it's going to back, but since the agency has been drawing down its reserves, it plans to raise the down payment level (to an unspecified level) as reported in this column by the Chicago Tribune's Mary Ellen Podmolik. And certainly, higher down payments will knock out buyers -- either first-timers or speculators -- who can't afford to put in 5 or even 10 percent equity.

But more important to many buyers, especially those with a little financial muscle, are temporary changes that went into effect yesterday that will make it easier for your mortgage lender to make loans against half-completed buildings.

Currently, the way it works is that if you want to buy a new-construction condo, you go to a lending bank and get it to approve your application. Then, the lender's underwriting department has to approve the building.

Buildings that haven't been 50 percent pre-sold have been SOL.

What does "pre-sold" mean? It means that those units need to have closed. So if you were buying into a 90-unit new condo, and only 35 of the units had closed, you weren't under FHA guidelines to get a mortgage.

Now mortgage pros may disagree with me here, but I'd say that even though buyers in the higher end of the market aren't necessarily getting FHA-backed mortgages, since lending banks have a herd mentality, if a building didn't fit into FHA guidelines, they weren't lending either.

This led to a very circular problem where the next wave of buyers who were in contract couldn't close, because they couldn't get mortgages -- and then places like South Florida, Las Vegas, and Manhattan were full of glossy new buildings that were mostly empty. They're known as "zombie condos."

Obviously the developers didn't like this, and neither did people who wanted to buy and found they suddenly couldn't get mortgages. Here in Manhattan, we were seeing buyers in unapproved buildings go through all kinds of contortions to close their sales. Doctors, for example, were turning to their employing hospitals to lend them the money that would enable them to complete their condo purchases.

Now the FHA plans to relax the pre-sold guidelines from 50 percent to 30 percent. From the point of view of someone watching that market, this news is huge. Our example building of 90 units with just 35 closings, suddenly fits into the guidelines.

It's important to remember that real estate markets are rarely monolithic. In an article in the Palm Beach Post headlined "New FHA rules a mixed bag for condos," Kimberly Miller quotes Grant Stern, a Florida mortgage executive, as saying "Palm Beach will definitely, definitely benefit from this." I'll go even further and say the changes jump-start entire markets where prices have dropped precipitously but there's a lot of unsold inventory -- South Florida, Las Vegas, Manhattan.

I'll be writing more about this in the coming weeks, but right now I've got to go -- I've got some client calls to make.